Evernote Gives Their Product Away, That Can't Work - Can It?

The part of being a Product Manger that I hate the most is pricing. How am I expected to come up with just the right price for my product? Who am I – Goldilocks: my product’s price is supposed to be not too high, not too low, just right? That’s a tall order. Now I’ve found out that this impossible task has just become harder: an entirely new way of pricing has shown up and it’s called freemium…

Why The Right Price For Your Product Is $0 (Not!)

Like ungrateful disaster victims who grab their Red Cross food packages and walk away without saying thanks, your customers would love to get their hands on your products for free. Now while this will make your customer extraordinarily happy, it will drive your company out of business overnight. Good marketing concept, bad business concept.

Damon Darlin at the New York Times has been looking into this new pricing scheme. Just like a product management version of crack, pricing your product at $0 is so attractive that you can find even the large guys doing it: Flickr, YouTube, etc.

Having an “it fell off the back of the truck so just take it” sale everyday for their products sure gets them lots of “customers”; however, even though they are huge and seem to be doing well, a close look at their books shows that free is a pricing model that is slowly killing them also.

How Do You Make Money If Your Product Is Free?

Wouldn’t you know it, there are actually some smart product managers out there who have taken the time to sit down and figure out a way to tame the wild beast that is a free product. While everyone else is getting eaten by the cost of supporting an unlimited number of freeloading customers, these guys have actually started to make some serious money. What’s their secret?

I know where these successful product mangers have been spending their time: strip clubs. If you’ve not been to a strip club in a while then you may not be aware of the clever marketing that goes on there. To get in to the club is generally free, to get the undivided attention of the performers is going to cost you.

This is the only place that the product managers could have realized that the secret to having a successful free product is to create a better version of the free product that once hooked, their users would be willing to pay more to get their hands on. What these paying customers are willing to pay is what the company can use to support everyone else’s use of the product (or they could sell expensive beer like they do in strip clubs).

The madness of giving away the product that you’ve worked so hard to create and spent so much to market is called freemium, a term that Fred Wilson, a New York venture capitalist came up with.

Show Me Some Proof That Freemium Can Work

Instead of drinking the kool-aid of free product pricing that all of the other companies seem to downing, Phil Libin who is the CEO of Evernote, a startup that offers a web-based storage system for personal information is brewing his own brand of product pricing.

Phil’s Christmas wish is that Evernote will be able to convince enough of the folks who are using their product for free to convert to paying customers in order for the firm to start making money.

Cracking open Evernote’s books reveals some interesting user behavior patterns:

• Longer Relationships Are Good: The longer a user continues to make use of the Evernote application, the more profitable they become to Evernote.

• One Night Stands: An amazing 75% of the people who use Evernote end up leaving within the first four months. You would think that no company could withstand this kind of enduser turnover; however, the money that Evernote is making from the 500,000 folks who have opted to start paying them is actually growing faster than Evernote’s overall customer base.

• Reasonable Prices: In order to entice users to become customers, Evernote keeps their prices nice and low: $5 a month or $45 a year for the extra features that heavy users just have to have.

• More Stuff Means More Value: somewhat unsurprisingly it turns out that the more that Evernote’s customers use their service, the greater the probability that those customers will end up as paying customers. The simple reason is that once you’ve got a bunch of stuff stored at Evernote, it would be a big pain to move it somewhere else.

Final Notes

If you’d like to lose your product manger job real quick, you just go ahead and march right in to your CEO’s office and tell him / her that you’d like to start giving your product away because you read a blog post that said that it was the trendy thing to do.

Nope, freemium is a crazy idea that works for some product managers, but probably won’t work for all. If your product is trying to break into a crowded marketplace and you don’t really have any compelling features that will make your product the “must have” solution, then perhaps a freemium approach would be a way to get some attention and lots of users.

If you do this, then your product is going to have to be able to get by on slim profits from each customer. Over at Evernote they only get 3 cents of revenue from each active user during their first month of use. This gets better after a year when those customers start providing roughly 35 cents each. You’d need a lot of customers to make this work out!

Are you up to it – could your product withstand freemium pricing?

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What We’ll Be Talking About Next Time

I’ve got a quick question for you: what is the next step in your career? What do you want to get promoted to? In fact, as long as we are talking about that, what comes after THAT promotion? In product management the career ladder generally goes: product manager, director, executive director, VP of marketing, Sr. VP, CEO. Got a plan on how you are going to get to that next step?

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3. Breakeven Analysis Is A Product Manger’s Secret Weapon Product managers know that how they price their products can...

Breakeven Analysis Is How Product Mangers Defend Their Pricing

Product managers know that how they price their products can be the difference between runaway success and total failure for their products. However, knowing this and knowing how to price well are two completely different things. In fact, there is often a great deal of outside pressure on product mangers to change their product’s price all the time. When should a product manger do this, and when should they not?

An Introduction To Breakeven Analysis

It turns out that numbers are on the side of a product manager when it comes to pricing. Assuming that you’ve done your homework and you’ve come up with what you believe to be a fair price, then you’ve got a good place to start from.

Almost without fail, folks on the sales team will show up and tell you that you’ve priced your product too high – they’ll never be able to sell it at its current price. This is where break-even analysis comes in.

The trick is that any discussion about your product’s pricing can’t just be about the price. Instead, it needs to also include a discussion of how many units will be sold at a given price. You got it – what we’re really talking about here is profit. Your company doesn’t really care if you sell a million copies of your product at $1 each or just one copy for $1M. What they care about is the amount of profit that they’ll make from selling your product.

Break-even analysis gives you the tools that you need to figure out how your product’s price and the quantity of products that need to be sold are related.

How To Use Breakeven Analysis

What break-even analysis is going to allow you to do is to calculate the minimum number of sales that your sales team is going to have to make in order to make up for any lowering of your price (or fewer sales if you are going to raise the price).

Here’s the formula:

The formula uses the amount that you want to change your product’s price by (in $) and divides it by your current margin (CM – how much profit you currently make on each sale) added to the price change once again. Note that the price change has a sign – negative if you are lowering your price, positive if you are raising it.

If you’d like to hear me explain this in greater detail along with some additional examples, it’s all online at Product Pricing: Cost Plus is Wrong, So What’s Right?

Final Thoughts

As product managers we are ultimately responsible for the success of our products. How we choose to price our products plays a big role in their long term success. Nobody will ever be happy with our pricing and we’ll always be asked to make changes to it.

Breakeven analysis is a tool that product mangers can use to expand the pricing discussion to include sales quantity. This turns the entire discussion into a profit discussion and that’s the type of conversation that product mangers should be having. Product managers who can do this will have have found yet another way that great product managers make their product(s) fantastically successful.

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What We’ll Be Talking About Next Time

So what do product mangers mange? Generally I’d agree with you if you answered “products“; however, I’ve been giving this some thought and I think that we’re missing the mark if that’s our answer.

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Product Managers Need To Manage Their Product Mix In Tough Times

Ok, I’ll say it one more time: times are tough all over. If you are a Product Manager who’s product is, how shall I say this nicely, priced on the high side then what are you to do in these troubling times?

Sure you can mess around with your product’s pricing and you could even consider launching another lower priced product line if you were so inclined. However, sometimes that’s just not possible. What then product manager?

Creatively Offering Less Expensive Products

This is one of those discussions that if we don’t get grounded real quick we’re going to end up flying off into the either and I’ll just be talking to  myself. So just for a minute, let’s pretend that you are the product manager who is responsible for Ferrari cars at an auto dealership – no you don’t make ‘em, but you do control the marketing mix.

Right now there are three new “hot” Ferrari models: F430, 599, and 612 Scaglietti. But of course it is a down economy Mr. Ferrari dealership product manager. What are you going to do?

The F430 is going to put your customers back about $218,000, the 599 will cost them roughly $320,000, and the 612 will put them back $313,000. Let’s not even talk about tax, tags, and dealer prep costs!

Hopefully it goes without saying that the Ferrari F430 is your bargain product here. In troubling times, when people go out to buy a Ferrari it sure seems like they’ll be picking up more F430s than other models. This is an important fact for any product manager to realize.

Only Make What You Can Sell

What our Ferrrari example is designed to help us understand is that one additional tool that a product manager has in his / her pocket is the ability to control your mix of products that you offer to your customers. If you were controlling what Ferraris a dealership presented to its customers you’d start stocking more F430′s and fewer 599′s and 612′s.

Now a small point of subtlety is required here. At our fictitious Ferrari dealership, we WILL be having some folks come in who are flush with cash and will want to buy an upper end 599 or 612. Fantastic! Let’s make sure that we’ve got a couple of those on hand so that we can take care of them and then stock the rest of the dealership with F430s.

Final Thoughts

I’m not a product manager responsible for stocking a Ferrari dealership; however, how cool would that be? Even if we are responsible for less glamorous products right now, the lessons learned apply to us also.

Right now most of our customers are trying to conserve money so they will be looking for lower priced products. If you are responsible for controlling the mix of products (or product configurations) presented to your customers, then you need to increase the low end and minimize the high end for now. At the same time, you need to realize that you’ll always have the occasional high end buyer and so you need to be ready to service them when they show up. This is how great product managers make their product(s) fantastically successful.

Questions For You

If you are responsible for multiple products / configurations have you been seen customers go cheap on you? How are you reacting to this shift in demand? Have you increased the quantity of low end products that you have ready to sell? Are you still ready to sell to a customer who wants your high end product? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

In the world of product managers there are a few stories that the old hands talk about when they get together. The product failures, the flubs, and the downright fiascos that have grown into legends that are now only mentioned in hushed tones when a  product manger is trying to kill a product idea that he / she knows will doom a product. One such story is the tale of New Coke.

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Stormy Economic Seas Can Cause Product Managers To Consider Slashing Prices To Stay Afloat

Not to get too doom and gloom on you or anything, but how is your product doing these days? Sales a bit down? Sales fallen off a cliff? Desperate times call for desperate measures and I’m willing to bet that you are starting to get some pressure from upstairs / sales to start slashing your product’s price.

Don’t do it! Pricing is a complex beast and if you start slashing, you’re not going to be able to raise it once things get better. I’ve got a different approach for you to take – try performance based pricing.

What NOT To Do In Bad Times

I’m not sure about you, but in my experience when the good ship business starts to run into stormy waters, the first thing the captain wants to throw overboard are the advertising and marketing programs (to which product mangers are firmly attached). Clearly, communicating with the customer is seen as an unaffordable luxury.

Can you tell that I think that this is a VERY bad idea? After those budgets have been given the old heave-ho, the crazed captain and his crew start looking at your product’s price as a heavy weight that must be gotten rid of if the firm is to make it through the storm.

In these desperate times, what nobody seems to remember is that if you dramatically lower the price of your product, you will have done two potentially fatal things to your product from which it may never recover.

The first is that you’ve now cut any profit that your product has been bringing in. This is pretty much like drilling a hole in the company boat. Now not only do you have to worry about the economic storm swamping the boat, but you’ve got red ink flooding in to the lower compartments and you not having a bailing bucket.

Finally, can anyone take just a moment and think about what a very low price for your product is going to communicate to your customer? The low quality / diluted brand effect is going to be like a sailor’s tattoo – you won’t be able to remember where you got it, but it’s always there.

A Different Way: Performance Based Pricing

Difficult times require innovative thinking – put down your PowerPoint slides and get your calculator out. What this means for you is that instead of slashing your prices, perhaps it would be better to do away with your existing pricing model all together. How’s that for out-of-the-box thinking?

What we’re talking about here is moving from a fixed price scheme like you have today to a performance based pricing scheme. This approach is best suited to product managers who have service based products, but with a little creative thinking it can be applied to almost any product.

Performance based pricing calls for you to stop charging your customer up-front for the full price of the product. You may still charge them some smaller fee to cover processing the order and perhaps shipping and installation. However, in these hard times their up-front charges will be dramatically reduced.

Fear not – your product has not become a charitable gift. Rather, your contract with your customer now reflects a sharing between your two firms of the benefits that your customer will receive from using the product. Ah, how’s that for a switch?

The Devil Is In The Details

As you can probably imagine, just how that contract gets written is the key to your product’s and your firm’s long term success with performance-based pricing. Almost all of the risk in this setup now lies on your shoulders…

There are three key performance-based pricing considerations that you need to keep in mind when you are working out the contract details with your customer:

• Stick With Customers That You Know: A pricing scheme like this needs to be used with customers that are operating in industries that you know something about. That new customer who is developing that tidal wave powered fuel cell is probably a poor candidate.

• Define “Success”: Your customer is buying your product to accomplish some very specific thing. Do you know what that is? Do they? Working out an agreement as to what “success” looks like is critical to making this type of pricing work.

• Control The Variables: Even if you both agree as to what success looks like, there are many other things that can get in the way of your customer achieving it. You need to lock down the possible variables that can allow your customer to claim that success was not achieved.

Final Thoughts

When you are awakened in the night by the ship’s captain who tells you that the boat is going down and your product’s pricing is too heavy and needs to be thrown overboard, remember that you’ve got options. In my experience, rash pricing decisions made quickly at the end of all-day strategy sessions always come back to haunt you.

Performance-based pricing is one pricing tool that you have that just might allow you to emerge from this economic storm with your product’s brand intact. This is how great product managers make their product(s) fantastically successful.

Questions For You

Are you getting pressure to slash your product’s price? Are you going to be able to say “no”? Have you tried anything else to lower your customer’s cost? Do you think that performance-based pricing would work for your product? Why or why not? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

Ok, I’ll say it one more time: times are tough all over. If you are a Product Manager who’s product is, how shall I say this nicely, priced on the high side then what are you to do in these troubling times?

P.S.: Free subscriptions to the brand-new The Accidental Product Manager Newsletter are now available.

It’s your product -  it’s your career.

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Post tags: advertising, brand, brand management, budget, CEO, customer, marketing, Performance Based Pricing, powerpoint, prices, pricing, product, product management, product manager, product managing, product marketing, product positioning, products, profit, Sales, software product manager, value pricing

Alibaba.com Has Changed Its Products To Deal With The Recession

Times are tough. Times are tough all over. This just happens to include China. Over there, one of China’s most prominent web-based companies is taking some innovative steps to deal with the current global recession. What they are doing to stay successful holds a lot of lessons for product managers everywhere.

When Things Get Tight…

Loretta Chao over at the Wall Street Journal reports that Alibaba.com provides a fairly simple service to their customers: they are sorta like a Chinese version of Ebay for businesses. They provide product listings on their site for Chinese firms that want to export goods and they provide translation services for firms that want to buy Chinese goods.

Back in 1Q08, they started to notice that their core manufacturing customers were starting to delay membership renewals and that the number of new members who were signing up was dropping off.

The Solution

So what did Alibaba do? The company’s business model operates by charging sellers for having listings on their site and for other services. The company responded to the downturn by cutting prices for the kind of customers that make up the core of their business. Additionally, they created a new program to help their customers find loans that would see them through the current financial crisis.

The Results

Immediately after introducing the new pricing scheme, Alibaba experienced 12,000 new paying members. This was 10x the number of members who had bought the package at the higher price in the previous 9 months.

The new pricing was put in place by creating a new category of customer: they get to purchase a “starter-pack” subscription that has fewer services than their main product, but its price is also 60% lower than the standard product’s price.

The Bottom Line

Yes, this new product offering is putting the squeeze on Alibaba’s profit margins. They were at about 45% last year and now they are hovering at 27.7%. Additionally, some existing customers have chosen to renew their memberships at the new lower rate (with fewer features).

However, most analysts agree that by changing its business model, Alibaba is now well positioned to grow its market share and become bigger and stronger when the economic slowdown is over.

Questions For You

Would you consider changing your product’s pricing to help your customers in these difficult times? Do you think that this would cannibalize your existing products? Do you think that this would improve your product’s position when the recession is over? Leave me a comment and let me know what you are thinking.

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What We’ll Be Talking About Next Time

I’m going to bet that your firm already has a web site that talks about your product in some shape or form. I’m also going to hazard a guess that you’re not terribly happy with the way that it looks or works (or doesn’t) today…

P.S.: Free subscriptions to the brand-new The Accidental Product Manager Newsletter are now available.

It’s your career -  it’s your product.

Subscribe to The Accidental Product Manager Newsletter now:
Click Here!

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Post tags: Alibaba.com, China, customer, customers, Loretta Chao, new product, new product development, new products, prices, pricing, product, product design, product innovation, product manager, product positioning, products, Sales, Wall Street Journal

Product Mangers Deal With A Recession By Changing Product Quantity

A recession, like the one that we’re living though right now, changes everything. Product mangers who had everything set up and working just right have been surprised to discover that all of a sudden customers are canceling orders and have stopped placing new orders. What’s a product manger to do?

Martin Roth and Richard Ettenson over at the Wall Street Journal have been doing some digging in order to find out how product managers can make the best of tumultuous times. They’ve interviewed lots of product managers who live in emerging markets and who have to deal with inflation, hyperinflation, and recessions.

What they’ve discovered is that product mangers who work in such tough economies are constantly being forced to rethink their business models in order to be successful. A really good example of this is how wireless services are sold in emerging markets.

In the U.S. wireless services are generally sold by getting customers to buy fancy phones with sophisticated features and sign up for long term contracts. This approach will no longer work in the depths of a recession when customers no longer have enough money to spend on such things.

In emerging markets this type approach to marketing and selling products has never worked. Instead, product mangers have had to come up with ways to match their customers’ varying spending patterns. During a recession, we can learn a lot from these product mangers.

The approach that is used to sell wireless service in emerging markets is to sell the product in much smaller, and cheaper, amounts. The product managers have realized that in order to be successful they need to make it easy for their customers to buy more of their product (minutes) when and where they want to. This means that in developing countries, you can “refresh” your wireless minutes just about anywhere including at retail stores and ATM stores.

This approach can be used for almost any product: make it easier for your customers to buy your product by selling it in smaller quantities and then making it easier for them to get more when they need it!

Is there any way that you could sell your product in smaller quantities? Would this allow you to attract more customers? How would you go about making it easier for your customer to get more of your product when they needed it? Leave me a comment and let me know what you are thinking.

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Product Mangers Need To Learn How To Ride Economic Ups And Downs

The Dow Jones Average plunges 700 points in a day. Then it rises 500 points the next day. Your best customer just suddenly goes out of business one day (Enron, Lehman Brothers, Circuit City, etc.). Sure seems like no Product Manger could ever learn to deal with the worst economy in a generation…

Wrong! Our brother and sister product mangers in Eastern Europe, South Africa, and Latin America have been dealing with markets like this for a long time. They see this as a time to take over rivals, implement bold ideas, and generally boost their business. Want to learn their secrets?

Martin Roth and Richard Ettenson over at the Wall Street Journal have been doing some digging in order to find out how product managers can make the best of tumultuous times.

One thing that they’ve discovered is that when the economy tanks, this is a great time to prepare for the future by getting your customers to trade up. This sounds rather backwards right? I mean when times get tough, people tend to trade down. Even though the margins on your stripped down products are skinner, most product managers think that SOME sales are better than none.

In emerging markets, product mangers have realized something much deeper. They get their customers to trade UP to premium products even though corporate budgets may be tight.

The key to doing this successfully is to be very, very careful about how you set the prices for the different tiers of your product offerings. You can’t make the price differences between basics and premium products too much or else your budget constrained customers will get turned off.

Instead, what you need to do is to accept a lower profit margin on your premium products – in fact, lower than most companies are normally willing to accept. However, we  are not currently living in normal times. You want to signal to your buyers that your premium products are a good value.

If you can signal to your customers that your premium brand is offering them more value for the money, then they will be both more willing to trade up to it as well as to stick with it during hard times.

An example might make all of this a bit clearer. Say your product is a software package that you sell in a basic package for 20 users that you price at $10,000, an advanced package priced at $12,000, and a premium package priced at $13,300. When the economy sours, what you want to do is change your pricing to what use an approach that’s called line symmetry. Now all of your packages are priced the same ($10,000) but the number of user licenses changes to 20 for the basic package, 17 in the advanced, and 14 in the ultimate. Now not only is the overall price lower, but the incremental price for each user license is smaller and more consistent.

Using this type of pricing scheme during a recession makes it easier both economically and emotionally for your customers to trade up to your premium products. Hard times call for novel product manger ideas.

Have you changed the pricing for your products to better deal with the recession? Are you trying to get your customers to trade up to your premium product offerings? Are you being successful? Leave me a comment and let me know what you are thinking.

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© Dr. Jim Anderson for The Accidental Product Manager, 2009. | Permalink | 2 comments | Add to del.icio.us
Post tags: brand management, Eastern Europe, incremental price, Latin America, line symmetry, overall price, premium product, premium products, pricing, product manger, recession, Sales, South Africa, trade up

A Price Fighter Product Might Be What Product Mangers Need

Times are tough. Your product, your baby, is struggling. New competitors are showing up in your market with lower cost alternatives. Try as you might, your sales teams are just not having any luck convincing your customers to shell out the extra bucks for your Cadillac product. What’s a product manger to do?

Lots of product managers attempt to deal with low cost competitors by cutting the price on their product. This can be a big mistake. Rafi Mohammed who wrote The Art of Pricing: How to Find the Hidden Profits to Grow Your Business says that once you start to do this, you’ll end up devaluing your product. Once things get better, you may find that you can’t raise your prices.

How about introducing a new product – a price fighter? Yes, that might seem just a bit counter intuitive right now to launch a new product, but it just might save your bacon. A price fighter product is a low cost version of your standard product. The key is to sell this product under a different name so that your customers don’t get confused.

You are are already aware of lots of other firms that are currently using price fighters:

• Procter & Gamble: premium product – Pampers, price fighter – Luvs
• Delta Airlines: premium product – Delta, price fighter – Song
• Anheuser-Bush: premium product – Budweiser, price fighter – Bush

The list goes on and on (Black & Decker / Dewalt, Sony / Aiwa). Price fighter products do two things: they allow you to preserve the pricing that you use for your premium product (while still allowing the company to make enough money to stay in business), and they take revenue away from your competition.

Reed Holden wrote a book called Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table. He pointed out that if you are planning on introducing a price fighter product, then you need to move quickly. Holden points out that Motorola took their time introducing cheaper cell phones and this allowed Nokia to jump in and own that part of the market.

So what do you think? Would a price fighter product help you to maintain your product’s pricing? How would a price fighter product differ from your existing product? Once things improve, would you discontinue the price fighter or would you keep it around? Leave me a comment and let me know what you are thinking.

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Post tags: brand management, buying, customers, new product, new product development, premier product, price fighter, prices, pricing, product launch, product manger, product planning, product strategy, Sales

Product Managers Need To Understand How Our Customers Make Their Buying Decisions

Who has to deal with irrational customers – isn’t “irrational” just another word for “crazy”? If you’ve ever had to set a price for your product, then you know what I’m talking about. No matter what price you pick (or how you pick it) people are always going to be telling you that it’s the wrong price. Is everyone crazy?

When we bump into problems like this that don’t seem to have any answer, it’s always a good idea to go talk to an expert. In this case, the expert is Dr. Dan Ariely who is an expert in behavioral economics and who works at Duke University’s Fuqua School of Business. Oh, and by the way, he wrote the book on what goes on in our heads when we go to make buying decisions: Predictably Irrational: The Hidden Forces That Shape Our Decisions.

All of us with a technical bent will not be pleased to hear what Ariely has to say. His main point is that when we go to price our products, we need to take into account that our customers will be using their irrational human behavior when they are deciding to buy us or not. Dang -  I hope that he’s got some suggestions for us…

Ariely’s first tip is for those product managers who are dealing with a revolutionary new product – one that really does not have a direct competitor. Just what do you price something like this at? His suggestion? Price it so that your customer can compare it with something that they are already familiar with. Why do this?

It turns out that we human being find that making decisions is quite tough to do. So when we encounter a new type of product, we struggle to place a value on it because we see it as existing by itself – in isolation. More often than not, what we end up doing is relying on old, past decisions (including comparisons to other products).

A great example of this is the TIVO DVR product. Just how do you go about pricing something like that when it first came out? The value is time saved, but what customer is going to sit down and calculate how much their time is worth and then figure out how much time they might save if they bought a TIVO?

We all rely on our past impressions in order to infer value on new things. This means that product mangers who want to understand how our potential customers make decisions about our products will need to take the actual decision process into account. Which is why relativity is so important…

Ariely also thinks that we need to know that the relativity of prices is a critical part of the customer’s decision process. If you were the TIVO product manger and you told your customers to compare the product to a VCR, then your customers are going to be unwilling to pay $500 for your products. However, if you told them to compare it to a computer, then they’ll be more than willing to spend $500 to buy it. Or you can do what Apple did…

Ariely’s final point is that the price that you use to define the value of your product will stick in your customer’s mind for a very, very long time. The most recent case study for how this works is Apple’s iPhone.

When first introduced, the iPhone was priced at $600. Almost immediately they slashed the price to $400, apologized to initial purchasers and gave them price difference refunds if they asked for them. Silly mistake on Apple’s part or clever pricing?

It may have been clever pricing: now a $400 iPhone seemed like a great deal when compared to the initial $600 price. When the price dropped to $200 it now looks like a fantastic deal because we all still remember the initial $600 price.

Do you take into consideration how your customer make their buying decision when you are setting prices for your products? Do you provide your customers with a product to compare your products price to? Do you start out pricing your product high so that customers will feel as though they are getting a great deal later on when you start to discount? Leave me a comment and let me know what you are thinking.

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© Dr. Jim Anderson for The Accidental Product Manager, 2009. | Permalink | 6 comments | Add to del.icio.us
Post tags: behavioral economics, brand management, buying, customers, Duke, new product, new product development, prices, pricing, product launch, product manger, product planning, product strategy, Sales

Cost Plus Pricing For Products Is Easy To Do, But It's The Wrong Thing To Do

Come on, admit it. You like cost plus pricing. It’s a product manger’s best friend. We all know how this story goes, you find yourself in charge of a new product and you spend all of your time working on nailing down what features it is going to have and when it will become available. Then there is that fateful day when someone asks you “What’s it going to cost?”

The simple answer is that you have no idea. If you’ve got competition, then you can probably use their price as a starting  point. However, if you don’t have clear competition, then you’re sorta stuck. This is when your old friend Mr. Cost Plus pricing always seems to show up.

Just in case some readers don’t quite know what cost plus pricing is, perhaps I should take a moment and define it for everyone. Cost plus pricing for a product is when you attempt to calculate all of the costs that went into creating it. You then add the appropriate level of margin on top of this cost and vola – you have your product’s price.

We all love cost plus pricing so much because it has this aura of being a “financial way of creating pricing”. I mean, if we are able to account for all costs and then priced our product above that level then we are just about guaranteed that we will be profitable.

The problem with this is that all too often, we are wrong. The reason that we’re wrong is because as the volume of products being created goes up, the costs of manufacturing goes down. If you are managing a service the same thing can be said – the more subscribers you have, the lower your cost per subscriber is.

Since your unit cost is changing with volume, your price will determine how much you sell. This will then impact volume which then impacts unit cost. Whew, it’s all connected!

A great example of how not to use cost plus pricing was provided several years ago by the good engineers over at Wang Laboratories. They invented the first commercial electronic word processor in 1976. Their product was a big hit. They used cost plus pricing to come up with a price for this revolutionary product.

The problem that they ran into was that in the early 1980′s personal computers become hot and they too offered word processing capabilities. As PC based word processing became more popular, Wang sales slowed.

This meant that their cost plus pricing required that they raise the price of their product even as their competition was reducing the cost of their products. Their pricing eventually drove away all of their customers.

So what’s wrong with cost plus pricing? Simple – cost plus pricing will cause you to over-price your product when there is a weak market and will cause you to under-price your product when there is a strong market.

So what’s the lesson to learn here? Hopefully, you now understand that cost plus pricing is a really bad idea. Instead, as a product manger what you need to do in order to ensure profitable pricing is to spend some time and decided on what your anticipated prices are going to be. Then, use this information to manage your costs. This type of value-based pricing needs to start BEFORE you make the investments required to breath life into your product.

How do you do pricing for your product today? Are you happy with your prices? Do they seem to be appropriate for the current market conditions? Have you ever tried a technique that is different from cost plus to set prices? Leave me a comment and let me know what you are thinking.

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© Dr. Jim Anderson for The Accidental Product Manager, 2009. | Permalink | 20 comments | Add to del.icio.us
Post tags: brand management, cost plus, IT Product manager, pricing, product manager, Sales, value pricing, Wang